VENTURE CAPITAL STILL FLOWS IN SAN DIEGO

Investment dips in 2nd quarter but far ahead of 2011 pace

Venture capital investment in San Diego companies dipped slightly in the second quarter compared with the first quarter but overall this year remains on pace to beat 2011 for the amount of money flowing into startups.

Two reports on local venture capital investment released today — one by Dow Jones VentureSource/Ernst & Young and the other by the National Venture Capital Association/PricewaterhouseCoopers — showed similar trends: Local venture capital investment cooled compared to the first quarter but remains well ahead of last year, led by some late-stage findings of more mature companies.

“Halfway through the year, we’re already two-thirds of where we were for all of last year, so we are still looking at a pretty decent year in the San Diego region,” said Doug Regnier, a Ernst & Young partner in San Diego. “Nationally, I think the last half of this year is going to have to be really big to get to where we were in 2011.”

Nationwide, both reports say the overall level of venture funding for the first half of this year remains below levels seen last year, in part because of less investment flowing into clean tech startups in capital-intensive fields such as solar and biofuels.

Other industries, however, are faring better both locally and nationwide. In San Diego, life sciences and information technology — the region’s mainstays for startups — led the venture-capital funding list in the second quarter. The two largest deals involved blood/tissue oxygenation therapy firm Sangart, which raised $50.7 million, and auto-fleet technology firm SmartDrive Systems, which netted $47 million.

Venture capitalists invested $305 million in 27 San Diego-area companies in the second quarter, down from $369 million invested in 25 companies in the first quarter, according to the National Venture Capital Association/PricewaterhouseCoopers.

For the first half of the year, however, $673 million has been invested in 52 companies locally. That compares with $410 million in 66 companies in 2011.

“If you look year-to-date, it’s really a nice increase in terms of dollars,” said Bill Molloie, a San Diego partner with PricewaterhouseCoopers. “This is actually the best year in the last three years through the first half.”

Investor appetite for initial public stock offerings appears to be improving — despite the setback from Facebook’s broken IPO in May. A handful of companies that followed Facebook into the public markets have done fairly well. For example, San Diego’s ServiceNow, which makes information technology software, went public on June 29 at an initial price of $18 a share. Its stock closed Thursday at $24.

“There is some appetite from the IPO investor seeking growth opportunities,” said Regnier, the Ernst & Young partner. “They’re seeking companies that have revenue and rapid growth stories. So the venture community is looking to invest in later-stage companies that have that revenue base and the ability to scale to get to that IPO exit.”

Regnier added that a wide range of companies in San Diego received funding this quarter, including firms working in business and financial services and consumer services.

“All that plays into those companies having revenue, scalability and growth stories,” he said.

While biotech and life sciences companies continued to receive the largest block of funding locally, the venture-capital investing climate for these firms remains cloudy because of concerns over exits, say experts.